throughout Life Stages
1. Project a retirement budget, but don’t compromise your standard of living. Ask yourself key questions, such as how you would meet future medical expenses, housing costs, and of course, travel and entertainment expenses. This will give you a target for your budget.
2. Review your assets to see if you are satisfied with their performance. Identify your lowest performing assets by listing them in order of their average rates of return. Consider reallocating your Money Management throughout Life Stages
On your way to developing and maintaining good financial health, you know you must
accumulate emergency funds for a rainy day.
A good financial plan often begins with saving three to six months’ worth of income and progresses into developing the capacity to meet your personal financial goals in the short term, as well as the long term.
A solid financial plan can play a big role in building financial independence for you and your loved ones. And yet, are you regularly reviewing your finances? Doing so becomes particularly important whenever you reach a new life stage. Milestones in your life such as marriage, homeownership, or the birth of a child make reviewing your financial plans a necessity. You may need to give your finances extra consideration upon reaching the following milestones:
First Job. When you obtain your first “real” job, it’s likely that you will be presented with employer-sponsored retirement savings plans. It is never too soon to begin saving for retirement, and taking advantage of your employer’s retirement savings plan as soon as possible will give your account the maximum amount of time and potential to grow. The combined effects of time and compound interest are powerful, and the sooner you start, the better. Try to contribute enough to your fund to take full advantage of any employer-provided matching contributions.
Also, learn about the insurance provided by your employer’s benefits plan including health, life, and disability income insurance. If your employer’s plan offers insufficient coverage, or if a plan is not offered at all, consider obtaining coverage independently. If you change jobs, pay attention to the benefits. Benefits will often vary greatly from employer to employer, and changes in insurance coverage and retirement options must be factored into your personal financial plan. For example, funds in your retirement plans might need to be rolled over as you continue to save.
Marriage. Weddings are special occasions that become cherished memo- ries long after the bouquet has been tossed and the rice has been thrown. They are also events that bring about financial changes. After getting married, you may consider opening a shared bank account, owning property jointly, and sharing auto or medical insurance. You may also want to begin saving toward the purchase of your first home and tart preparing to raise a family.
Obtaining and/or updating life insurance plans to reflect a name change, if applicable, and to include your spouse as your beneficiary will help to ensure that financial goals will continue to be met. Review retirement plans and goals to establish a savings plan that aims to fulfill your retirement needs. Getting married will also most likely affect your tax situation. Think about the most effective tax strategies that will help with annual filings, as well as your long term goals.
New Home or Re- financing. Buying a first home is a happy event. Now, the money you may have spent on rent will build equity in a place that you own. Whether you are a first-time homeowner or you are looking to refinance, research the various mortgage types available to find the one that best suits your needs. In addition, you will have to find a homeowners insurance policy that will suit your coverage needs. This is also a good time to review life insurance policies to assure that mortgage obligations will remain covered.
Children. With the added joy and responsibil- ity of a child comes the need for extra financial safety. Update your medical plans to include the child. In addition, review your life insurance policy to ensure you have adequate coverage amounts, and include the child on the beneficiary list.
For an infant college is 18 years away, yet the sooner the family starts saving, the better. A college fund that has many years to earn interest and contributions is ideal. Children may also change your estate plan. Writing or reviewing your will becomes especially important to make sure the child will be provided for and suitable guardians will be named.
Starting Your Own Business. If you leave your old job to start your own business, you will have to assume responsibility for previously employer sponsored benefits. It is important to maintain retirement, medical, and life insurance plans as you continue building financial security.
Retirement. Now is the time to enjoy the fruits of your labor. You may be considering relocating to a warmer climate and anticipating all of the adventures you will have there. However, your funds will still require attention as you continue to manage your money. Remember to maintain adequate health care coverage, and know your long-term care op- tions. Proper planning can help preserve your hard earned assets from being spent on potential medical expenses.
Perhaps one of the best feelings in life is knowing that you are financially independent and are prepared for whatever may happen. Through annual checkups you can assess financial goals, provide for your loved ones, and build for the future. As you approach each new life stage, you will find that additional consideration and planning are well worth the effort.
Preserving Your Legacy with a Solid Estate Plan
Watching a house under construction offers a fascinating, learning experience. Each element builds on the next, working up from the foundation to the floors, walls, and finally, the roof--until the building is safe from the elements and provides security for a family. Constructing an estate plan is a similar process.
If you “construct” your estate on a solid foundation, according to a well-designed plan, it can securely “shelter” your loved ones for the future. Just as all house styles do not suit all families, neither do all estate plans. A “one size fits all” approach to estate planning should be avoided. Your estate plan should be customized to fit your specific needs and those of your spouse, your family, and if applicable, your business.
A solid estate plan should, among other things, specify and provide for the distribution of your property after your death, provide for the care and financial support of your dependents and include sufficient funds to help pay for final expenses and estate taxes. A major part of any estate plan is a strategy to minimize or reduce the estate tax burden.
Minimizing Estate Taxes
Many couples are familiar with the unlimited marital deduction, which allows the spouse who dies first to leave his or her estate to the surviving spouse free of estate taxes.
However, a married couple with assets exceed- ing $2,000,000 may face a sizeable estate tax liability.
This is because each individual’s assets above the $2,000,000 applicable exclusion amount (in 2008) are subject to estate taxes. (Note: The applicable exclusion amount will increase to $3.5 million in 2009. Federal estate taxes are currently scheduled for repeal in 2010, but will be reinstated in 2011 without further legislation from Congress.) Without a proper estate plan in place, the first spouse to die may be unable to use his or her respective applicable exclusion amount.
A number of estate planning techniques, including credit shelter provisions in a will and trusts, could be used, depending on the circumstances, to take advantage of both spouses’ applicable exclusion amounts. To illustrate, let’s consider the hypothetical case of Fred and Melanie Moore, whose combined assets total $4,000,000. Fred’s estate is worth $2,800,000, while Melanie’s is worth $1,200,000. Due to the unlimited marital deduction, if Fred dies first (in 2008), his assets will automatically pass to Melanie free of estate taxes.
Melanie’s estate will then be worth $4,000,000 (Fred’s $2,800,000 plus her $1,200,000). However, at Melanie’s death (also in 2008), the maximum amount she may transfer to their surviving children free of estate taxes is $2,000,000 (her applicable exclusion amount). The remaining amount of assets over the applicable exclusion amount ($2,000,000 in 2008) will be subject to estate taxes, which can be as high as 45%. This tax can take a sizable chunk out of an estate, unwittingly making Uncle Sam a significant beneficiary.
However, if Fred had a properly structured trust (which must be established while he is still alive), he could place his entire $2,800,000 estate into the trust. (This would require retitling his assets to be owned by the trust.) At his death, Fred’s trust would be able to fully utilize his $2,000,000 applicable exclusion amount. This $2,000,000 would still be available to Melanie for income and support and would ultimately pass to her children free of estate taxes.
Fred’s remaining $800,000 (his original $2,800,000 estate minus the $2,000,000 used to offset the applicable exclusion amount) would pass directly to Melanie at his death. This would leave her with a total estate worth $2,000,000 (her original $1,200,000 plus the $800,000 Fred left her). At Melanie’s death, her $2,000,000 applicable exclusion amount will allow her to pass her entire estate to her surviving children free of estate taxes. In this case, proper planning can allow the Moores to pass their entire combined estate of $4,000,000 to their children free of federal estate taxes. This estate planning technique may enable a couple to use both of their applicable exclusion amounts, and it is just one example of how a solid estate plan can help you and your family.
Just as you would consult a contractor when building your house, it is important to consult your experienced legal, financial, and tax professionals to help ensure your estate plan is appropriate for your circumstances and will achieve your objectives. With a well constructed estate plan, you can rest easier knowing you have done all you can to preserve your legacy.